Back to 'Plain-Vanilla' Debt as Texas' Baylor College of Medicine Dumps ARS

DALLAS - Baylor College of Medicine in Texas will get closer to eliminating its outstanding auction-rate debt and all outstanding debt enhanced with insurance from Ambac Assurance Co. with next week's planned negotiated sale of $255 million of hospital revenue refunding bonds by the Harris County Cultural Education Facilities Finance Corp.

The bonds are currently scheduled to go to market on August 20.

The sale will include two series. A $200 million fixed-rate tranche will refund $66.9 million of bonds issued in 1998 and $125 million of bonds issued in 2005. A $55 million variable-rate issue enhanced through letters of credit will refund $50 million of bonds sold in 2005.

"The $200 million is all fixed-rate debt with no enhancement," said Brett Sweet, chief financial officer and vice president for finance and administration at the large medical school located in the Texas Medical Center district near downtown Houston.

"We'll be refunding all the remaining auction-rate debt and the bonds that were insured with Ambac with the two series," he said. "That will be the end of that, and we'll come out of it with plain-vanilla, no-excitement, mom-and-pop debt."

"Three years ago I would have told you how pleased we were with the structure of our debt," Sweet said. "But when things went bad, they went bad fast."

Sweet said investors became wary of the college's insured variable-rate debt, despite Baylor's underlying strength as the only private medical school in the Southwest, because of market concerns over several downgrades of the insurer's credit rating.

"Many were not willing to look below the surface and see the strengths, which had not changed," he said. "They just saw the Ambac coverage, and you can imagine what the investors thought of that."

The once triple-A rated bond insurer has seen its ratings cut to the double-A level with negative outlooks in the wake of the subprime mortgage market meltdown.

Sweet said Baylor has been able to keep the interest rate it pays on its auction-rate debt in reasonable territory by buying the bonds at auction.

"We've been buying back our own auction-rate debt ever since the Securities and Exchange Commission allowed us to," Sweet said. "We did that just to get it off the street."

The $200 million issue is rated A by Standard & Poor's. No other agency provides an unenhanced rating for the medical school's debt.

The underwriting team includes Citi, Merrill Lynch & Co., Wells Fargo Brokerage Services LLC, and Goldman, Sachs & Co.

Bond counsel is Fulbright & Jaworski LLP. The medical school's financial adviser is First Southwest Co.

Sweet said he expects annual saving on debt service of about $3 million to $4 million with the restructuring.

Baylor is also in the process of restructuring the remaining $245 million of bonds outstanding from $400 million of auction-rate bonds issued for it in 2007 by the Harris County Health Facilities Development Corp.

The 2007 bonds, which are insured by Ambac, are to be restructured by the end of August to weekly rate debt enhanced with three-year direct-pay letters of credit from Wachovia Bank NA and Bank of America NA. If the conversion is not successful, according to the preliminary official statement for next week's deal, Baylor intends to refund the 2007 debt with variable-rate debt enhanced with letters of credit.

Sweet said the upcoming issue would not be enhanced with bond insurance because none is available at a reasonable cost.

"There is no bond insurance left," he said. "The premiums are just not economically feasible."

"I think we're in a new era of credit enhancement," Sweet said. "Things will probably come back, but it is going to take a long time for that to happen."

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